As we discussed on the first day of class, on July 26, 2022, the Invesco Solar ETF (Ticker: TAN) closed at a price of $72.63/shr, and ran up to $85.57 in the ensuing 3 days. We attributed the lion's share of that dramatic price rise to the passage of the IRA in the US. One of TAN's largest holdings is SolarEdge Technologies (Ticker: SEDG), whose share price went from $296.48 to $360.13 over the same 3 days. According to YAHOO Finance the consensus earnings estimate for SEDG was/is $9.30 for 2023.

a) Suppose that, prior to the announcement, the analysts' consensus was that SEDG would be able to generate ROE of 25% for the ensuing 5 years, and would reinvest 100% of its earnings through 2027, but would start paying out 80% of its earnings as dividends starting in 2028. Assume that the 20% of earnings that are reinvested starting in 2028 can earn an ROE of 20%, and assuming SEDG's cost of equity was 9%, show that SEDG shares were approximately correctly valued at $296.48.

b) Now suppose that the announcement of the IRA caused analysts to reevaluate the growth opportunities of SEDG. Specifically, assume that analysts now upgraded the prospects for SEDG's longer-term ROE to 25%, but otherwise left their assumptions intact. Show that you can justify the jump in share price up to $360+/shr.

c) Finally, SEDG shares closed at $144.76 on Thursday September 14, 2023. Analysts' consensus earnings for 2024 is now $10.88, implying 17% growth. Now, assuming that analysts adjusted their near-term growth in earnings downward from 25% to 17%, and assuming that the entire price drop from $360.13 to $144.76 is attributable to a change in SEDG's cost of equity, as well as this ratcheting down of near-term growth, what was SEDG's approximate cost of equity as of Thursday September 14 (2 decimal places is sufficient in your answer)?

Answer rating: 100% (QA)

a To determine if SEDG shares were correctly valued at 29648 before the announcement we can use the ... View the full answer